Q2 2025 Rackspace Technology Inc Earnings Call

Speaker #2: Good day, and thank you for standing by. Welcome to the Rackspace second quarter 2025 earnings conference call. At this time, all participants are on a listen-only mode.

Speaker #2: After the speaker's presentation, there will be a estion and answer session. To ask a question during the session, you'll need press star, one, one on your telephone.

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Speaker #2: I'd now like to hand the conference over to Sagar Hebbar, head of investor relations. Please go head.

Speaker #3: Thank you. And welcome to Rackspace Technology's second quarter 2025 earnings conference call. I'm Sagar Hebbar, head of investor relations. Joining me on today's call are Amar Maletira, our chief executive officer, and Mark Marino, our chief financial officer.

Speaker #3: As a reminder, certain comments we make on this call will be forward-looking. These statements, in all risks and uncertainties, which could cause actual results to differ.

Speaker #3: A discussion of these risks and uncertainties is included in our SEC filings. Rackspace Technology assumes no obligation to update the information presented on the call, except as required by law.

Speaker #3: Our presentation includes certain non-GAAP financial measures and adjustments to these measures which we believe provide useful information to our investors. In accordance with SEC rules, we have provided a reconciliation these measures with our most directly comparable GAAP measures in the earnings press release and presentation both of which are available on our investor relations website.

Speaker #3: I will now turn the call over to Amar for an update on the business.

Speaker #4: Thank you, Sagar, and welcome everyone to our second quarter 2025 earnings conference call. Results for the second quarter met our expectations across all key metrics.

Speaker #4: Revenue and operating profit exceeded the midpoint of a guided range, while EPS was within our guided range marking a 12th consecutive quarter of meeting or exceeding guidance.

Speaker #4: Sales pipeline generation remained strong across both the business units, with bookings as measured by annual contract value growing 2% sequentially and 16% year-over-year. The driven by private cloud, which secured several key wins, non-GAAP operating profit grew 34% year-over-year, and we delivered positive cash from operations of $8 outperformance was primarily million for the quarter, reflecting our operational and financial discipline.

Speaker #4: Now, me get into our segment performance starting with private cloud. Private cloud bookings in the second quarter of 2025 grew 24% sequentially and 42% year-over-year, driven by several large long-term deals across key industries including healthcare, BFSI, and telecom.

Speaker #4: We also saw double-digit year-over-year bookings growth across both the Americas and EMEA, underscoring the broad-based strength of our go-to-market efforts. This solid bookings performance was despite a large healthcare deal that caught push, and we expect this opportunity to close within the third quarter.

Speaker #4: Revenue for the private cloud segment came in at $250 million in line with guidance and down 4% year-over-year. We are seeing continued revenue stabilization as prior year bookings convert into revenue, reflecting the strength of our underlying business.

Speaker #4: Our disciplined focus on revenue retention and growing bookings momentum continues to lay a solid foundation for a long-term sustainable growth. We are making strong progress in our strategic expansion into the mid-market and enterprise segments, positioning us to capture new opportunities and drive future scale.

Speaker #4: In April, we signed a long-term agreement with a leading healthcare provider in the US to host their virtual desktop infrastructure supporting clinical kiosks. hosted on a hyperscale public cloud.

Speaker #4: The customer is getting enhanced control consistent performance, predictable and highly competitive costs by transitioning the environment to Rackspace's secure private cloud. This win underscores Rackspace's expertise in delivering compliant, high-performance infrastructure for critical healthcare and other enterprise workloads.

Speaker #4: We also expanded our relationship with a large UK bank through a strategic engagement to modernize its entire edge infrastructure. We have been engaged to deploy a secure network solution across approximately 80 branch locations.

Speaker #4: Our engagement is a comprehensive end-to-end managed service over five years. Our private cloud team continues to deliver innovative solutions, in the second This was previously quarter, we had 13 product releases and 28 enhancements.

Speaker #4: More notably, we announced Rackspace OpenStack Business, a new open-source dedicated solution for organizations running mission-critical or regulated workloads. This fully managed offering delivers enhanced performance, improved security, and comprehensive operational support, all without the overhead and complexity of managing your own infrastructure.

Speaker #4: Overall, to-market and solutions momentum in the private cloud segment remains strong. Reflected in both our results and customer wins. We remain focused on expanding our footprint while continuing to defend and grow our private cloud business.

Speaker #4: Now, turning to public cloud. In the second quarter, bookings for public cloud grew 1% year-over-year, primarily driven by strong performance in EMEA. Services bookings increased 6% sequentially, reflecting our disciplined focus on higher-value engagements.

Speaker #4: Revenue for the segment totaled $417 million exceeding our guided range. Revenue declined 2% year-over-year, due to expected declines in lower-margin infrastructure resale. We continue to focus on services revenue, which grew 3% sequentially and remained flat year-over-year.

Speaker #4: We are also seeing success in increasing our footprint with existing relationships. In the second quarter, we expanded our engagement with our top-tier aircraft leasing company, their leveraging Rackspace's data modernization and engineering services to accelerate their data transformation strategy and platform implementation.

Speaker #4: Additionally, we expanded our offering with a mid-size cybersecurity company, through a long-term deal that bundles infrastructure and services demonstrating a continued ability to deliver integrated solutions that align with client needs.

Speaker #4: On the product side, we introduced Rackspace CloudOps, a managed service that offers 24/7 operational support in the cloud. CloudOps is purpose-built for mid-market organizations at any stage their cloud journey, helping them drive operational excellence, optimize performance, and maximize cloud efficiency.

Speaker #4: This expands the service offerings that can be attached infrastructure resale. In summary, our focus higher-value services, strategic bundling, and expanding existing customer relationship is yielding positive results.

Speaker #4: Our services revenue continued to grow sequentially, underscoring continued progress in our public cloud business. Turning to AI, we continue to make good progress with FAIR, which is Foundry for AI by Rackspace, with over 80 wins and over 235 opportunities in our pipeline of which over 20% are already in advanced stages along with several active leads we are pursuing.

Speaker #4: Last month, we announced a strategic alliance with enterprise AI agent innovator Semaphor.ai, bringing together Rackspace's application and infrastructure management expertise with Semaphor.ai's advanced safe AI agent platform.

Speaker #4: Through this partnership, organizations will be able to rapidly deploy scalable production-grade AI agents across key business functions built on a foundation of strong governance, transparency, and security.

Speaker #4: Additionally, we launched the FAIR model context protocol enterprise accelerator on the AWS Marketplace. Empowering organizations to deploy AI agents at scale with robust security and seamless integration.

Speaker #4: This solution delivers 70% plus reduction in legacy application integration time accelerating value realization and enabling real-world impact across healthcare, finance, and manufacturing sectors. We are also driving AI innovation across a service offerings in public cloud.

Speaker #4: AI integration within our services spans three areas. Accelerating cloud migration timelines by 20 to 30%, reducing operational overhead for our managed services teams by 10 to 20%, and automating security operations at scale.

Speaker #4: For example, we recently reduced migration time by 40% using SnowConvert AI for a leading healthcare services company. These AI at-scale initiatives are accelerating time-to-value for customers, and strengthening our position in enterprise transformation through intelligent automation.

Speaker #4: Before I wrap up, I want to sincerely thank our customers, partners, and all our rackers. I'm pleased with what we have achieved this quarter, and encouraged to see momentum in acquiring new and expanding with existing customers.

Speaker #4: We remain laser-focused on a key strategic priorities for 2025. Building a sustainable business model that consistently delivers revenue, profit, and cash flow growth. With that, I will turn it over to Mark to walk us through the financial results and guidance.

Speaker #5: Thanks, Amar. In the second quarter, total company GAAP revenue of $666 million was down 3% year-over-year and slightly up sequentially. Beating our guidance, driven by solid performance across both business units.

Speaker #5: Non-GAAP gross profit margin was 19.8% of GAAP revenue, slightly down year-over-year, driven by lower cost absorption in private cloud while it remained flat sequentially.

Speaker #5: For the quarter, non-GAAP operating profit was $27 million exceeding the high end of our guidance and up 34% year-over-year. The improvement was largely due to OPEX efficiencies in public cloud and in corporate overhead.

Speaker #5: Partially offset by lower cost absorption in private cloud. Non-GAAP loss per share was 6 cents, at the lower end of our guided range at 4 to 6 cents loss per share.

Speaker #5: This was primarily due to higher expenses within the other income and expense line driven by accruals related to data center leases as well as lower than expected diluted share count.

Speaker #5: Second quarter cash flow from operations was $8 million and free cash flow was negative $12 million. We ended the quarter with $104 million in cash on hand and $414 million of total liquidity.

Speaker #5: Turning to our segment results. For private cloud, GAAP revenue for the second quarter was $250 million which was in line with our guidance. Private cloud revenue decreased 4% year-over-year due to customers rolling off older-generation offerings partially offset by revenue from new bookings.

Speaker #5: Sequentially, private cloud revenue was relatively flat. Private cloud non-GAAP gross margin was 36.8%, down 50 basis points year-over-year and 30 basis points sequentially primarily due to lower fixed cost absorption on lower revenue.

Speaker #5: Non-GAAP segment operating margin was 24.6%, a year-over-year decline of 190 basis points driven by lower gross margins and higher OPEX. Sequentially, non-GAAP segment operating margin was up 20 basis points driven by lower OPEX, partially offset by lower non-GAAP gross margin.

Speaker #5: In our public cloud segment, GAAP revenue was $417 million surpassing the high end of our guidance. Public cloud revenue was down 2% year-over-year as a result of a decline in infrastructure volumes and flat sequentially driven by growth in high-margin services business.

Speaker #5: Offset by declines in low-margin infrastructure resale. Non-GAAP gross margin was 9.6%, down 20 basis points year-over-year reflecting one-time benefits realized last year. Sequentially, non-GAAP gross margin was up 10 basis points driven by favorable rate and mix.

Speaker #5: Non-GAAP segment operating margin was 3.9%, up 140 basis points year-over-year due to improved OPEX efficiency and slightly down sequentially as a result of higher OPEX.

Speaker #5: Now onto guidance. We expect third quarter GAAP revenue of $660 to $674 million flat sequentially and down 1% year-over-year at the midpoint. In private cloud, we expect revenue of $246 to $254 million flat sequentially and down 3% year-over-year at the midpoint.

Speaker #5: We expect public cloud revenue of $414 to $420 million flat sequentially at midpoint. Total non-GAAP operating profit is expected to be $30 to $32 million and non-GAAP loss per share is expected to be $4 to $6 cents.

Speaker #5: Our non-GAAP tax rate is expected to be 26% and non-GAAP share count is expected to be $239 to $241 million shares. In the second half of 2025, we expect strong free cash flow generation positioning us to exit the year with $70 to $80 million in positive free cash flow.

Speaker #5: This trajectory reflects the strength of our business model and financial discipline. I'll now turn the call back over to Sagar.

Speaker #3: Thank you, Mark. Let us begin the question and answer session. We ask everyone to limit discussion to one question and one follow-up. Please go ahead.

Speaker #6: As a reminder, if you'd like to ask a estion at this time, please press star, one, one on our telephone. And wait for your name to be announced.

Speaker #6: To withdraw your question, please press star, one, one again. Please stand by while we compile the Q&A roster. Our first question will come from Kevin McVeigh with UBS.

Speaker #7: Great. Thank you so much. And congratulations on the results. I don't know whether it's for Amar or Mark, but maybe both. Maybe talk about the guidance.

Speaker #7: It looks like a little bit of uptick sequentially, but definitely more outpaced success on the free cash flow. So maybe talk about, you know, is there any seasonality you think about in the guidance sequentially?

Speaker #7: Just relative to kind where you came in and then ultimately if you uld spend a minute on the free cash flow conversion as well.

Speaker #8: Right, Mark. Yeah. Oh, sure. So yeah, thanks, Kevin, for the question. Yeah, in s of our Q3 guidance, you're right, all 660 to 674, with the midpoint around 667, right?

Speaker #8: We're eing things ultimately kind of flat sequentially from a private cloud perspective. We are, you ow, forecasting some uptick on the public cloud side, especially on the services while infra continues to stay sort of flat as to slightly down.

Speaker #8: You know, and in terms of free cash flow, for the year, you saw we called out, you know, positive for the second half, positive for the full year.

Speaker #8: We did have some seasonality in first half of the year related to some kind one-time vendor prepayments. And in those will not cycle in the second half.

Speaker #8: So that's driving a lot of our rovement as well as higher adjusted EBITDA and overall working capital performance. So I feel pretty confident about that free cash flow range.

Speaker #7: Terrific. Thank you.

Speaker #9: And so Kevin, if I may just give some color on private cloud. So as Mark mentioned, we are forecasting a flat revenue in private cloud sequentially.

Speaker #9: Now, this will be, Kevin, as you ow, this is three quarters in a row. As we had mentioned before, we expect private cloud business to start stabilizing and that's exactly what we are seeing.

Speaker #9: And we feel good about the, you ow, the bookings performance that we had. The mix of the bookings also came in quite favorable. It was a broad-based bookings performance in the private cloud business.

Speaker #9: And so pretty pleased with the performance there. In fact, just to give you some color here, you ow, the mix of the bookings in private cloud is actually changed significantly from a deal-size perspective.

Speaker #9: Now, if you go back to fiscal '22, roughly about 60% of the deals that we had were about small-size deals, right? The lower ACV value.

Speaker #9: And now, if you add about 40% was mid-size to large-size deals, and that has now actually flipped in 2024 and 2025. First half of '25, 40% of the deals were small deals and 60% was large and mid-size deals.

Speaker #9: So that's the very important dynamics that we are starting to see, and this is on top of us growing a double-digit CAGR in the last, you know, two and a half years.

Speaker #9: Similarly, the contract length has also gone up. In fact, the contract length, if I have to just go back to '22, you know, we had roughly 25% of our bookings in fiscal '22 where deals with longer than 24 months.

Speaker #9: Today, in the half of '25, as well as in fiscal '24, that number is now close to 50%. So the deal sizes have gone up.

Speaker #9: The contract length has gone up, which means we are really building a good book of business here across a lot of most of the verticals as well as from a geo pective.

Speaker #9: And on public cloud, because since you asked about the guidance, in public cloud, we feel good about the services performance. You know, this quarter, we saw services revenue in Q2 was flat.

Speaker #9: Sequentially, we expect that to was actually up sequentially and flat year-on-year. We expect that to services revenue to start growing in the second half.

Speaker #9: In fact, in Q4 of 2025, our fourth quarter, we expect our services business in public cloud to grow anywhere from 10% to 20% year-on-year.

Speaker #9: So which will be a real good turn in the business. In the public cloud business, so pretty pleased with the performance in the public cloud business too.

Speaker #9: And Amar, just remind me, I know we talked about this a couple of times, but the services on the private side and I guess what's driving the the strength on the public side and then just just any thoughts on the services on, I guess, more on the implementation work on the private?

Speaker #9: Just anything or just around services on the private side as well. I know maybe just any thoughts.

Speaker #8: Yes, yes. Thank you very much. So let's start with the public cloud side, Kevin. You know, just as a recap, we have three types of services that we offer to our ustomers.

Speaker #8: On one end is professional services, and then you have managed services on the other end of the spectrum. Which is long-term contracts and very sticky and then right in the middle is elastic engineering.

Speaker #8: And then we offer this across applications, platform, as well as data. We are starting to see broad-based strength across all those three services, mainly professional services, as we go and try more cloud migration work.

Speaker #8: We also drive work in AI as an example, which are mainly professional services kind of engagement. We are starting to see our data business, for example, I've ioned that before.

Speaker #8: Our data business, this quarter, in Q2, I mean in the second quarter, grew sequentially the bookings grew sequentially significantly. So we are starting to see strength in data, strength in applications, strength in platform support across professional services, elastic engineering, and managed services in that quarter.

Speaker #8: So and we attach our services to infrastructure also went up. You know, about when we do an infrastructure sale today, 70% we attach 70% of services to it.

Speaker #8: So for every dollar of infrastructure, we are attaching at least 70 cents of services to this infrastructure resale business. So the services attach motion is working well, good execution on the field.

Speaker #8: And also, it's and the offerings that we have is playing to this to where the market is heading. More and more work is on the transformational side, digital transformations led by cloud and AI.

Speaker #8: And that really plays to our strength in public cloud. So that's those are the factors. Macro, as well as our execution, that gives us confidence that we are now turning the corner on services.

Speaker #8: On the private cloud side, you know, we offer managed private cloud for our ustomers. Clearly, healthcare we really hit the sweet spot with healthcare to strong even in Q2.

Speaker #8: When I look at just the healthcare vertical, in the first half, it grew 60-plus percent year-on-year compared to the first half of last year from a revenue perspective.

Speaker #8: So really, really good performance there. We are in good deals in the funnel. And you know, we also are starting to see traction. We had a good traction in the telco sector.

Speaker #8: With some very good deals signed. And if I look at the services component, the main services component in private cloud, Kevin, is all managed services.

Speaker #8: Very, very sticky business. Once we get this business, it stays with us for the next three, two, close to seven years. And that's the the average contract length has also gone up significantly in that business.

Speaker #8: Hopefully, that's helpful.

Speaker #7: Very helpful. Thank you so much, Amar.

Speaker #8: Thanks, Kevin.

Speaker #6: Our next question comes from Frank Luthen. With Raymond James.

Speaker #3: Great. Thank ou. You mentioned getting some more traction in the mid-market. Kind of what investments do you think you'll need to make there either on the sales or the support side?

Speaker #3: And then with regard to the partnership with some of the AI agents, how that come about? And when can we begin to see some of the benefits of that more broadly across the business?

Speaker #3: Thanks.

Speaker #8: Yes, yes. Absolutely. Thanks, Frank. So in terms of the focus is always been, Frank, in mid-market and enterprise. Both in both public cloud as well as private cloud business.

Speaker #8: And we have made those investments in our fiscal '23 end of fiscal '23 and fiscal '24 and now you're starting to see benefit of this.

Speaker #8: You know, for ample, in a public cloud business, we have grown in public cloud for several quarters in a row from a bookings perspective.

Speaker #8: So, not much of an investment in incremental investments is needed now from a go-to-market perspective. Frank, we will be making investments on the edge. For example, the healthcare vertical has really kicked off very well.

Speaker #8: You know, we went from being a small player in in 2022 to being a really good being a very viable credible player in the healthcare provider space with our ate cloud offerings in '24 and '25.

Speaker #8: So not much of investment. Most of the estments will be even the CapEx investments will be success-based. So if you win a customer, then only we make an investment in CapEx.

Speaker #8: Now, talking AI and you ow we have started to see a lot traction in AI in both the businesses. In fact, let me start with private cloud first.

Speaker #8: As you know, you know our offering in private cloud is we will we would our goal is to become a private AI infrastructure provider for our ustomers.

Speaker #8: So we think about workloads and we will be focusing mainly on inferencing workloads. That inferencing workload, Frank, will either be run on public environment, public cloud, private cloud, or at the edge.

Speaker #8: And we like our chances of winning in the private AI as well as at the edge. And we'll partner with the hyperscalers on the public cloud side.

Speaker #8: As an example, for the first time, you ow we won a private AI infrastructure deal with a healthcare organization in the US. That actually supports adults with development disabilities.

Speaker #8: Now, they were facing some major there were some major pain points there. In terms of care delivery, manual and time-consuming review of services, no slack of automation, and so we basically put delivered an AI-powered solution which was a combination of a private AI anywhere managed infrastructure with NVIDIA GPUs as well as an elastic engineering services and we wrapped that around with managed services.

Speaker #8: So you know this has resulted in 80% you know reduction in the manual review time. It has improved the care of delivery. So this is a good example of how we are now you know basically also catering to the customers' needs on you know having their private AI inferencing workload close to where the data is.

Speaker #8: Similar you know in on the public cloud side, we implemented a really a very good AI agentic AI platform with JCrew and we went public with that.

Speaker #8: JCrew, as you know, is a ing fashion retailer. They were really struggling with the effectiveness and efficiency of their customer vendor and employee support organization.

Speaker #8: So we were we actually implemented three distinct AI agents: one for their IT department, one for their vendor management, and the third was for customer service.

Speaker #8: And this was architected powered by Amazon's Bedrock as well as cloud Sonnet models. So great examples of how we are winning now in the AI space.

Speaker #8: We also announced since you asked about agentic AI, I want to also highlight this. We announced a good partnership with a company called Semaphor.ai.

Speaker #8: Which is a very innovative company backed by Mayfield Venture Capital firm and our Rackspace and Semaphor.ai are highly complementary in what we bring to table for our ustomers.

Speaker #8: For example, Semaphor.ai will provide the agentic AI platform and Rackspace then brings in the delivery muzzle including the infrastructure. And so we are we are basically bringing a complete turnkey solution for, I would say, utting-edge AI agentic platform at the enterprise grade both from implementation, operations, and governance.

Speaker #8: And bringing technology and sales solutions together. So feel very good. And then lastly, we are also internally becoming an AI company. Frank, there's a lot to talk about AI.

Speaker #8: You know our CTO, Shrini Kaushik, and his organization working with all our functional leaders have done a fantastic job in implementing agentic AI within the company to drive productivity of our functional personnel's also it's now we're bringing it to the CSM as well as the sales community.

Speaker #3: Okay. Great. That's a very great answer. Thorough answer. Appreciate that.

Speaker #8: Thanks, Frank.

Speaker #6: That concludes today's question and answer session. I'd like to turn the call back to Sagar Hebbar for closing remarks.

Speaker #9: Thank you, Liz. Thank you, everyone, for joining us today. If you not get your question or if you have a follow-up, please email us at iarch@rakspace.com.

Speaker #9: Have a great evening, everyone.